Shareholder disputes can place immense strain on a business- even more so with family-owned companies where personal and professional ties get intertwined. In particular, the recent decision of Lane v Lane [2024] EWHC 2616 (CH) highlights the importance of ensuring that shareholders should record, in writing their agreement as to how they intend their Company to operate.
An Overview of the Lane v Lane Case
The dispute in this case involved a family-owned construction business, AGM Brickwork & Stonework Ltd. In 2003 father and son had chosen to incorporate their partnership, and the Company was formed thereafter. In 2003 a meeting was held with the Company accountant and on the advice of the accountant, the shares were to be allotted as follows: 40% to the son and father and 10% each going to the daughter-in-law and mother.
A trust structure was also set up, from which all the shareholders received monies.
It was alleged by the son that in a meeting in 2008 it was agreed that if either the father or son died their shareholding would transfer to the other. This agreement was not written down.
After the father died, his widow bought an unfair prejudice petition based on two issues:
- The shares should not have been transferred to the son following the father’s death because this was contrary to the articles of association; and
- the Company failed to pay her any dividends (she had received money from the trust) and had not acted in the Company’s best interests in setting up the trust
The court found in favour of the son holding that there was indeed an oral agreement to transfer the shares and found that in relation to the trust, all members had agreed to set it up and the mother had received monies greater from the trust than she would have in dividends, so the court took the view the mother had suffered no prejudice and no unfairness.
Written Agreements: Why They Matter
In this case the agreements that had been formed, had all been done so via oral conversations. There was no written shareholder agreement detailing what should happen on the death of a member or in the event of a dispute. While the court believed the son’s perspective on what took place, i.e. they upheld what was said at the meeting, this result depended significantly on witness credibility and unique family facts. A well-documented shareholder agreement would have eliminated uncertainty and prevented an expensive dispute. It is often thought that informal agreements, especially those involving shares, are not valid but this case shows that they are. Indeed, the courts found that even if they hadn’t have upheld the sons argument that there was an oral agreement, they would have found the son to have a promissory estoppel argument e.g. the son had relied upon a promise made by his father to his detriment.
For any business, formalisation of such arrangements in writing is a must to avoid having to rely on memory or subjective interpretation. It is also worthwhile to consider what will happen with your other shareholders and come to an agreement ‘in the good times’ – if you wait until there is a dispute, it will be too late to reach an agreement.
Shareholder agreements not only clarify rights but also provide legal protection of the shareholders by laying out terms on important matters such as transfer of shares, votes and dividends. That aides to bolster and refresh companies’ shareholder agreements that address changes in a company’s structure, or where the relationship among shareholders changes through acquisition sales.
Having said all of that, this case does provide a precedent for arguing that informal arrangements can have credibility and be enforced; but relying on such agreements is risky for all the reasons already mentioned.
A Claim of Unjust Prejudice
Claims of unfair prejudice enable the minority to challenge those in control of the company whenever their conduct has been at odds with the rights or legitimate expectations of minority shareholders. The mother’s claim, while unsuccessful, represents a critical path for minority shareholders who believe they are being sidelined from the decision-making process.
In order to prove a minority shareholder has suffered “unfair prejudice”, a shareholder will need to show that the business conducted itself in a way which unfairly disregarded their legitimate expectations as a shareholder. This assertion is especially beneficial when the majority’s behaviour financially prejudices a minority shareholder or disenfranchises their voting rights. Nonetheless, the burden of proof in these situations will be steep as it is typically difficult to establish bias and misconduct, absent some form of express shareholder or operational agreement explaining expectations.
As set out above, in this case the Judge found that as the mother had received funds from the trust and was involved in the setting up of the trust and that the funds she received were more than the dividends she would have been likely to have received if it were not for the trust; it was deemed that the mother had not suffered any prejudice.
What Can be Done to Reduce the Chances of Shareholder Disputes?
The case of Lane v Lane contains a number of important lessons for companies wishing to avoid or deal with disputes between shareholders:
- Put Agreements in Writing: A written agreement is a simple yet necessary measure of protection. Topics like share transfers and rights, as well as what procedures will be used to settle disputes should appear in any effective shareholder agreement. It provides a concrete reference and minimises the need for verbal agreements.
- Respect Minority shareholder rights: Majority shareholders need to be conscious of the rights of minority shareholders as well to not risk a finding of unfair prejudice. When the company is transparent with its finances, dividend payment, and other decision-making approaches, shareholders can feel more trust and confidence in the company, therefore lowering grievances.
- Encourage Early Resolution of Disputes: Most conflicts do not result in legal battles, however, when one does, the best practice is to act as soon as possible.
- Keep Track of Limitation Periods: All claims may be subject to a limitation period, so it is important for shareholders to know what the relevant limitation periods are for any potential claims they want to pursue.
The case of Lane v Lane acts as an illustration of how shareholder disputes can play out and how to take pro-active steps to avoid them. For any company, clear, written agreements and an understanding of minority rights are vital components in safeguarding against prolonged disputes. By encouraging transparency, formalising agreements, and early intervention, businesses can reduce the risk of conflicts and create a more stable environment for growth.
Our Company Commercial Team are able to assist you in drafting a shareholder agreement. If, however, you do find yourself in a dispute our Commercial Litigation Team will be able to advise you on your rights and your position and devise a strategy with you, to move forward.